Deeming rule change for property flipping
Let’s start with defining what “property flipping” actually is. Essentially, this involves purchasing residential property and reselling the property in a short period of time to earn a profit. This also includes assignment sales or “shadow flipping” – reselling the rights to purchase a property prior to its official sale or construction.
From a taxation perspective, a “flipped property” is a housing unit located in Canada not already considered to be inventory of a taxpayer, and was owned by a taxpayer for less than 365 consecutive days prior to disposition (i.e., sale). There are a number of exceptions to this, including:
- Death of the taxpayer or person related to the taxpayer
- A related person joining the taxpayer’s household or the taxpayer joining a related person’s household
- Breakdown of a marriage or common‑law partnership for at least 90 days prior to disposition
- A threat to the personal safety of the taxpayer or related person
- The taxpayer or related person is suffering from a serious disability or illness
- Involuntary termination of employment of the taxpayer or the taxpayer’s spouse/common‑law partner
- An eligible relocation of the taxpayer or their spouse/common‑law partner for business, employment or educational purposes
- Insolvency of the taxpayer
- Destruction or appropriation of the property
On Jan. 1, 2023, a new deeming rule applying to flipped property came into effect. The purpose of this new deeming rule is to ensure profits are subject to full income inclusion.
Under the new rule, profits from the sale of flipped property are deemed to be business income. Therefore, such profits cannot be treated as a capital gain and do not qualify for the 50% capital gains inclusion rate. Likewise, the Principal Residence Exemption is not available. It is also important to note any losses resulting from the sale of a flipped property are deemed to be nil.
If you have any questions or concerns relating to property flipping or any other tax matter, don’t flip out. Just contact one of our advisors today and we’ll guide you through all the details.